A UK start-up trying to put the plumbing of the vast foreign exchange market on the blockchain has secured two of the world’s biggest traders, Citadel Securities and XTX Markets, to its fledgling service.
The two market makers are the latest of 22 banks and traders in advance testing of a system run by London-based Cobalt, a financial technology company that aims to modernise the base of the global currency market, where $5tn a day of cash and derivatives deals change hands.
Their involvement raises the stakes in a race among infrastructure providers to become the dominant force as blockchain technology — an electronic ledger with records stored in “blocks” — moves into the daily operations of global markets.
Proponents see blockchain as a way to apply 21st century technology to the complex networks of trust and verification on which modern finance sits. Banks and traders hope a more efficient system can cut IT costs and improve the audit trail in a highly fragmented market. Most of it is also off-exchange, with deals transacted between big banks.
Banks can spend about $500m a year on technology for currency trading, and Cobalt, founded by former traders, estimates it can cut costs by about 80 per cent.
Citadel Securities is the market-making arm of the US hedge fund while UK-based XTX, with just 74 employees, has elbowed its way into the top 10 biggest currencies traders by market share in the two years since it was founded.
“What we are particularly pleased about is that these guys know technology. It’s a big part of their business.” said Adrian Patten, chairman of Cobalt. “They’ve been testing for months and are prepared to support us in improving the market infrastructure. It’s important to them to have cost-effective infrastructure as the cheaper those costs, the more aggressive you can be on your pricing.”
Cobalt’s system is expected to go live in the third quarter. It is running on technology developed by Setl, a UK blockchain software developer, and has data from First Derivatives, a Northern Ireland company that is also an investor. Citigroup, with the biggest share of the global FX market, has also invested in the project and will use it.
The amount by which Cobalt believes it can cut banks’ average $500m currency trading IT costs
The Cobalt platform will be among the first commercial systems employing blockchain in financial markets. NEX is also developing a blockchain for spot foreign exchange transactions on to a blockchain. It will announce further plans in coming weeks. Cobalt said it could link up with other emerging blockchain developers, such as NEX, Digital Asset Holdings and R3’s Corda.
Kevin Kimmel, global head of eFX at Citadel Securities, said Cobalt’s platform was “an important step in enhancing FX market efficiency, particularly around credit and clearing”.
Cobalt is headed by Andy Coyne, a former Citi and Deutsche Bank trader, and executive at ICAP.
Mr Patten, the Cobalt chairman, founded forex brokerage Mako FX. “We started off with a problem we were looking to solve. We came into this as blockchain sceptics,” he said.
Cobalt will also open an office in the US, which will be headed by Devika Darbari, who joins as chief operating officer from JDX Consulting.