LoopFX: Why We Invested
The capital markets opportunity; partnering with early-stage innovators
By Johnnie Martin, Investor at Augmentum Fintech
When we invested in WeMatch in 2021, we wrote about how innovation in the capital markets space had lagged behind other fintech verticals, but that there was great promise in cooperation and collaboration between incumbent institutions and fintech businesses. Since our investment, WeMatch has gone from strength to strength, recently passing $400bn in Ongoing Notional Volume and exemplifying the power of partnerships between incumbents and startups.
Over the past 2 years, we have seen significant progress being made across capital markets infrastructure as incumbent firms continue to leverage collaboration with smaller, more agile players to enable transformative digital innovation.
One sub-segment of capital markets where we have long been cognisant of inefficiencies is that of foreign exchange (“FX”).
We are pleased to share that Augmentum has led a £2.6m investment in LoopFX
Blair Hawthorne and his team are building what we believe is one of the most innovative businesses in the space and we look forward to working with them to bring more efficiency and transparency to this market.
The need for innovation in the one of the largest financial markets globally
The institutional FX market is the largest financial market in the world with an estimated $7tn in daily trading volume¹.
The market is highly concentrated in both specific currency pairs and counterparties who trade these pairs. In April 2022 sales desks in only five countries (UK, USA, Singapore, Hong Kong and Japan) intermediated 78% of all global FX trading.
Despite the market size and global importance, institutional spot FX traders face a number of challenges when placing large block trades of $10m or more. These large trades are:
1) expensive to execute;
2) risk moving the market adversely through potential information leakage; and
3) incur market risk during the longer execution window
Spot FX trades are an unregulated product but do fall under MiFID II’s “Best Execution” trading regime, which “requires investment firms to take all reasonable steps to obtain the best possible result for their clients, taking into account price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to order execution”.
Adhering to the regime and being able to demonstrate best execution practices has proven challenging in the past given the level of uncertainty traders need to operate.
LoopFX — a win-win solution for the FX market, with limited behavioural change
Blair founded LoopFX late in 2021, as a former FX dealer himself, he was frustrated by existing trading practices and found that, despite wanting to get the best price for his clients, options to execute in a demonstrably better way were somewhat limited. The market expected real-time decision making to be guided by historical performance, a faux pas that is written into nearly every financial disclaimer — “past performance does not guarantee future returns”. Yet every day, Asset Managers, through no fault of their own, execute the largest FX transactions in the world based on Banks performance several weeks or months previous.
Blair believed the market deserved better, and this led to the creation of LoopFX, where Asset Managers and Banks can match offsetting trades in real-time, silently at a mid-market rate.
Growing up as a promising chess player in Scotland, much of Blair’s early life was spent trying to make better decisions on the chess board. Fast forward a decade of trading FX at one of the world’s largest asset managers, he is creating a way for traders to make better decisions when executing their trades.
Blair has a vision that will allow for large institutional trades to be silently matched within a Dark Pool between asset managers and banks. All this whilst the trader remains in control over Who they match with, How much they match, When they match and What price they match. Once a match is found, the trade is settled at an independent market mid-price, thereby providing a fair outcome for both sides of the trade.
LoopFX is integrated into existing trading systems and to date the company has signed agreements with FX Connect and Portware, representing over 50% of daily institutional volumes. We believe that it is this embedded distribution and collaboration with existing infrastructure that will allow LoopFX to plug seamlessly into the existing ecosystem and increases adoption in the marketplace.
LoopFX is a real win-win for all parties:
For Asset Managers, if a full or partial match is found, information leakage and execution costs are significantly reduced. If no match is found, Dealers are able to trade in full confidence that there was no counterparty available, at that specific time, who could have offset that trade, providing comfort to Fund Managers, Compliance departments, regulators and ultimately the end investor. Critically, allowing Dealers to demonstrate a higher level of Best Execution.
For Banks, LoopFX reverses the current paradigm and pays Banks for matched liquidity. This is an extraordinary turn versus the status quo.
Backing the right team
Key to success in propositions such as these is to be not only embedded in the ecosystem, but also to be surrounded by the right people. Blair has built a stellar team with deep FX domain expertise and connections across this industry. COO Timothy Johnson brings senior FX sales experience from Amex, 360T and CME group and looks after operations and strategy of the business. CTO John Vause is an experienced technologist who managed State Street’s e-Comm business in Canada and EMEA. Christian Werner, is a talented Product Developer, building simulators and dashboards to optimise matching outcomes within the matching engine, and recently LoopFX also hired Peter Khadder from Standard Chartered as Head of Trading.
The board, which is chaired by John Sievwright and includes experienced financial services entrepreneurs Martin Gilbert, Michael Soutar and Ivan Ritossa, brings knowledge and experience from some of the world’s largest, most successful companies. Tim Levene, CEO of Augmentum, will be also joining the board.
While early in their journey, we believe that Blair and team are perfectly positioned to capitalise on the opportunity to bring a more efficient, fairer way of trading to the FX markets through partnership and collaboration with blue chip financial institutions.
If you are a founder building a transformative business in capital markets, the Augmentum team continues to look for further category defining propositions. Please do reach out if we have not yet met.
1: BIS Triennial Central Bank Survey 2022
