Early on January 15, 2015, Citi's single-dealer platform blew through its risk limits and shut down, directing users to the bank's trading desks rather than providing an automated price. Minutes earlier, the Swiss National Bank (SNB) had announced it was killing off the four-year floor that prevented EUR/CHF falling below 1.20, and Citi Velocity's prices could not respond quickly enough, producing instant losses for the bank.
That part of the story is the same at every bank with a foreign exchange platform, but clients say Citi did two things differently. First, it switched Velocity back on whenever input prices reappeared, such as those on interdealer forex market EBS, even though the rate remained unpredictable; second, unlike a few of its rivals, Citi did not try to back away from orders it had accepted in those first frantic minutes of trading. In total, the bank is believed to have racked up losses of around $150 million on the day, although it claims to have recouped this in the weeks that followed.
"There were other bank platforms that went completely dark – not immediately after the SNB announcement, but perhaps 10 minutes after," says a forex trader at one algorithmic trading firm. "Even EBS eventually went dark for a period of time that day. We traded with Citi through the episode. There were periods of high volatility, where their prices might have been gone for a minute or two, but they always came back and we continued to trade with them on the screen. We were on the phone with them, dealing with the situation and amending trades. From a pricing standpoint they were definitely there, still providing service, while other banks ran away."
This commitment makes Citi Velocity our single-dealer platform of the year, but it has already reaped more important rewards – adding clients throughout 2015, with many citing bad experiences at other dealer platforms in the wake of the SNB decision, says Al Saeed, global product manager at Citi Velocity in London.
From a pricing standpoint they were definitely there, still providing service, while other banks ran away
Forex trader, algorithmic trading firm
"The thing that really stood out that day was Citi's forex business never stopped market-making. I can't honestly say we were pricing every single second of every minute of that interval, but in every instance when there was a semblance of a market we came back. The system did not go down, which gave us a tremendous amount of comfort, given it was an unprecedented event. Also, the voice coverage was there throughout, regardless of the fact it was an illiquid market for a while, so clients could still manage their orders and request a price from the voice traders through the platform," says Saeed.
Clients testify to this. "We had a euro/Swiss franc stop order with Citi in place on January 15. We saw huge movement in the market, the franc dropped from 1.20 down to around 0.85, and there were periods where it was very hard to trade. You could see on the Reuters forex screen there were almost no trades being executed at all," says one bank treasurer.
"Our stop order was just a few basis points below the 1.20 floor and we were not sure we could be filled, but right away the Citi guys called us. They explained the situation, because they wanted to be sure we could be filled, and in the end we did get filled in the amount we had to. They gave us a price – not a price close to where our original stop order was, but it could have been much worse if we had to take the low of the market," the treasurer adds.
The swift action taken by the Velocity team on January 15 was only possible due to the work undertaken by Citi to unify electronic screen-based trading with the human support offered by trading desks.
"The line between a pure e-service and a regular desk service is very blurred on Velocity, and that works in our favour," says Saeed.
Some other platforms continued making prices, but later regretted it. As Risk's sister publication, FX Week, first revealed, Barclays spent January 15 contacting many counterparties to tell them it wanted to cancel trades it had committed to that morning. The bank later changed tack, attempting to convince clients to execute previously agreed trades at 1.06 - an approach one client described at the time as "appalling".
Over the past 18 months, Citi has spent a lot of time and money extending Velocity from an exclusively forex platform to one operating across asset classes and products. It did so by opening up systems first developed within Citi to support inter-affiliate trading, allocations and order management across all of the bank's divisions.
I can't honestly say we were pricing every single second of every minute of that interval, but in every instance when there was a semblance of a market we came back. The system did not go down
Al Saeed, Citi Velocity
"We build our trading tools for ourselves and if a tool does not work well internally we would not roll it out to our customers. We had great co-ordination between the product units in building cross-asset functionality and the key was having a single cross-asset Velocity development unit. Rather than having people try to build units differently and then stitch them together, it was done correctly from the outset," says Stuart Riley, global head of securities & banking and SFS technology at Citi in London.
As part of this effort, the Velocity team nearly doubled in headcount, from 60 to 110. Velocity is funded centrally, so the shared trading technology used across asset classes receives the majority of the funding, with the individual asset class units being allocated smaller sums. The result is a federated structure broken into four segments – FX Velocity, Futures Velocity, Commodities Velocity and Credit Velocity.
"We want to get to a stage where we would be able to offer a macro trader operating across asset classes a one-stop shop for all services – not just execution, but pre-trade analytics, news, communications, allocations and post-trade services for the entire trade life cycle. Those asset classes must hang together in a seamless way, so the user does not feel they are moving through different platforms built by different parts of the bank, which we have seen in some of our competitor platforms," says Riley.
It seems to be working. User numbers jumped from 68,690 in the third quarter of 2014 to 83,438 a year later. More than 100,000 Citi clients receive analyst research through the platform and, given 2015 was the first year of multi-asset class trading on the platform, Saeed is hoping for further growth this year.
"Going into 2016, we are going to continue pushing the vision that the entire sales and client franchise should be in one ecosystem where they can use the same products, communicate, and share things back and forth within the platform. We have recently signed more legal agreements to onboard more big funds to the platform that were disappointed with the way they were handled by their competitors during the January 15 event, so the new structure is working," says Saeed.
There are regulatory clouds, or at least question marks, hanging over Citi Velocity and its competitors though. The landscape in the US is relatively clear at this point. Any over-the-counter derivative mandated as ‘made available to trade' (Mat) by regulators must be traded on either an exchange or a swap execution facility (Sef) where dealers will be put into direct competition with one another.
Mat products are currently limited to vanilla interest rate swaps and index credit-default swaps, with non-deliverable forex forwards believed to be next in line for the designation. This will allow dealer platforms to continue acting as shop windows for the bank's own prices in all non-Mat swaps and other instruments for the foreseeable future.
The regime in Europe is less clear. The second Markets in Financial Instruments Directive (Mifid II) and its related regulation (Mifir) will create a Sef-like multi-dealer trading venue called an organised trading facility (OTF), with large dealers and their captive platforms likely to be treated as systematic internalisers (SI). The rules applicable to each are slightly different and the way they interact creates other complications; an SI cannot own an OTF, for example, implying any bank wanting to turn its platform into a multi-dealer venue would need to house it in a separate legal entity.
We want to get to a stage where we would be able to offer a macro trader operating across asset classes a one-stop shop for all services – not just execution
Stuart Riley, Citi
Dealers should, on the face of it, be able to continue offering their own liquidity exclusively as an SI, but under that regime there is an obligation to publish all bids and offers prior to execution, and to give all clients the chance to transact on a quote provided to any single customer. This promises to end the traditional dealer practice of giving better prices to favoured clients, potentially wiping out one of the key advantages enjoyed by a dealer platform over exchange-type venues, where all clients receive the same price.
While continuing to develop its platform, Citi has set up a global team to assess the shifting regulatory environment and it is trying to keep its options open. The team is split in two, with one working on best execution tools and analysis, while the second is looking at an ‘open framework' platform to allow Citi to extend Velocity to third-party liquidity providers should this be the best course of action.
"The team is currently detailing the implications of the pre-trade and post-trade transparency requirements, as well as any other aspects of Mifid II, and we are currently finalising our implementation plans with a view to starting key development work in 2016. We're confident we will be able meet Mifid II and any other emerging global regulatory requirements, and retain our single-dealer platforms as part of Citi," says Saeed.
With capital rules penalising trading businesses while derivatives reforms endorse all-to-all liquidity provision, a single-dealer platform may look out of step, but clients say they can offer important benefits in terms of speed and price.
"There are times when trading at an ECN is a better option than trading at a single-dealer platform, but time and again you will get better pricing on the latter than the former, both in electronic trading and through voice. If you are trying to hide your trading strategy, you may want to go into the open market to do that, but when I am looking for best price, and to be able to get in and get out quickly, I use Velocity exclusively because that is what they are very good at," says the algorithmic trader.