Having revolutionized the business of buying stocks, Vanguard Group is now coming for currencies.
The investing pioneer obsessed with lowering costs is testing a new way for asset managers to trade currencies and avoid big investment banks, according to a person familiar with the matter. The platform, based on the blockchain technology that powers Bitcoin, has been operational for two months and has handled some trades, said the person, asking not to be named because the project is private.
If successful, the venture could shift power in the $6 trillion a day currency market that banks such as JPMorgan Chase & Co. and Deutsche Bank AG have ruled for decades. While skeptics say it will be challenging to get enough investment firms on board, the cost savings of peer-to-peer trading could prove appealing in a world where profits are being squeezed by a race to the bottom on fees and mounting regulatory burdens.
“Direct trading really is the Holy Grail for the buy-side,” said Campbell Adams, a former senior currency trader at Deutsche Bank who founded a platform called ParFX in partnership with banks including Citigroup Inc. and JPMorgan. “In theory, it sounds great because you can reduce your costs if you can match directly with someone else who has a countervailing interest,” he said. Yet “it will require a critical mass of users.”
Breaking From Banks
Vanguard, with more than $5 trillion in total assets, trades about $2.5 trillion of currencies a year, Andy Maack, its global head of FX trading, told an industry publication this year. There’s a “tremendous amount of interest in the potential for disintermediation,” he said in an interview last month with The Trade, describing a system that would be “decoupled from banks” and price discovery would move to outside platforms able to match peers.
“Vanguard is currently piloting a project focused on improving the efficiency and reducing risk of FX hedging,” company spokeswoman Carolyn Wegemann said, declining to elaborate. It’s part of the firm’s commitment to “lower the cost of investing for all investors,” she said.
Bloomberg LP, the parent company of Bloomberg News, operates an FX trading platform for banks.
The project would be among the most significant applications of blockchain in finance. While nearly all major banks and money managers are experimenting with the technology to do everything from issuing bonds to processing payments -- JPMorgan has developed its own digital token and Banco Santander SA has issued tokenized debt -- few have used it in large-scale commercial operations.
The project’s success would also mark a leap in the evolution of the FX market, which has been inching toward a peer-to-peer model over at least two decades, said Adams, who has more than 30 years experience trading currencies and now runs Pure Digital, a venue for cryptocurrencies.